Good morning. My name is Stefan Randstrand. I have the privilege to be heading Tommer Group. I'm here today together with Espen Gundersen and Bing to present our 2018 and Q4 'eighteen results. If we look into 2018 of Tamra, we have an exciting year behind.
We have seen actually very good momentum in the recycling business. If you look into the whole world, there's a lot of material being recycled. China in the beginning of the year decided that it will not no longer become the waste of the world. My name is Stefan Randstrand. I have the privilege to be heading from our group.
I'm here today together with Espen Gudelussen and Bing to present our 2018 Q4 'eighteen. We are making a rehearsal here. If we look into 2018 of Tom Ra Actually, I recorded this yesterday. So what do they call that, a playback or what do they call it? So you have the right to get your money back for your tickets.
So I don't know if I should restart, but I do restart very shortly. Very nice to be seeing you all. Thank you for coming and thank you for attending. Espen, Gundersen, Bing and myself, Stefan Randstrand, would like to present Tamra's Q4 2018 results. 2018 was an exciting year for us.
We had good momentum in recycling. You might recall that in the beginning of the year, China said we will no longer be the waste dump of the world. They put up a regulation which they called National Sword and that led to that countries that until now have been exporting their plastic or their waste into China no longer could do so. And you see the mountains growing of waste because they could no longer export it and we also in result of that. So we have very strong demand for sorting equipment, which is not a short term story that will actually continue, but we just saw that increase in 2018.
And we see that some other markets are coming in where they are actually exporting instead of to China, into Malaysia and to some other like Indonesia and so on. And these countries themselves are trying to put up a ban on this because it is not right to export waste. It's an opportunity actually to make local use of it and create green jobs. But that's not part of the story here. I just wanted to say that we had a good momentum in recycling and we probably expect to be continuing experiencing good business in that environment.
We also saw a lot of discussions fairly new for us when it comes to new deposit markets. Actually, Espen talks about the tsunami, I'd rather talk about the surf wave here, because tsunami is a little bit have negative effects. So it can be quite sunny and nice. We think that that is something really exciting. We'll talk shortly about the most present ones shortly.
In the food, we experienced a solid market situation. We expect food to be less event driven. It is a steady, continuous growing business as the world needs more food, as there is a need for automation because of cost of labor, shortage of labor and in some markets actually you have no alternative. If you take a country like China, just using an example, they have a lot of people working in the farming sector, predominantly old people, very manual farming work and food processing work. And as most of the young people are actually moving into the cities, it remains with the older generation to produce the food.
China being the food producer and food consumer in the world, they need to solve that. Automation is part of the solution here. So we think that not only in China, but this is a continuous good business. And they are looking for the need to automate to replace people and also need to bring quality assurance. And that's exactly what we contribute to with our solutions.
Further to that, in 2018, we did get the opportunity to acquire BBC Technologies, a New Zealand based company focusing on predominantly in blueberries, they are number 1 in the world, but also doing some sorting of cherries and cherry tomatoes, a really fine company. We are very proud owners of them and they have not disappointed us so far. We're also very excited about them in the future. We further to that in November last year had the opportunity to enter into Queensland with 10 sites for in line with their new deposit system. It's quite a different system to that which we have experienced in New South Wales.
But nevertheless, we got 10 sites and we are happy with the start phase there. It went flawlessly. So I'm very proud of the team that we have the ability to also serve a market which is really on the other side of the world, go in, start up on a date, win a new solution because all of them are somewhat different. It doesn't look like in Germany. It's a somewhat different setup, but the team is geared up to engineer a solution, bring it to shore, install it and turn it on, on time.
It's quite magical, very, very proud moment for us all. And we had a full year for the first time of Queensland. So Queensland sorry, New South Wales. New South Wales, we commenced the 1st December in 'seventeen. So 'eighteen was a full year.
Within the 1st 12 months, we collected more than one €1,000,000,000 objects, so quite an achievement. Many of these objects would otherwise have ended up in the oceans, in the land, but now people see this is a good option. And we have threw out very positive feedback. It was a little bit grumpy in the beginning because also because of delays. For us, the challenge was really to get sites where we could put our machines.
But once we came over that, once we got the system working, it's well recognized by the politician, by municipalities and by the public and we are very pleased with that. It's well in line with our expectations, actually exceeding it slightly. So it's a good start for us there. So it's good to see that we have the ability to do this kind of, if I call them, exotic products. They are in a way not exotic, but they are far away and it's a new market and I'm really proud of that our team has the ability to do that.
Looking at 2018 further, some big topics affecting TOMRA, plastic oceans. We are swimming in plastic more and more. And one way, our way to contribute to solving that problem is to reduce the inflow of plastic. We do not intend to clean up the ocean. We can we don't have the technology to do that.
But by collecting plastic material, we can prevent it from entering to the ocean and that is our approach to it and that's how we also see our business contributing to a major mega problem. We also had a lot of discussions on ban on single use plastic on political level, on European Union level and we see effects of that. I will talk shortly about that. Circular economy is a topic which we see more and more every day, going very from linear where you consume through a where you say consume and reuse or reduce, reuse, recycle And that's spot on where we want to go. And European Union came out with a very clear indication of what they understand as single use plastic directive.
I'll talk about that shortly, but it largely affects TOMRA. We also had a Capital Markets Day where we clearly staked out our future. TOMRA is zooming in on 2 main areas. 1 is circular economy. The other one is future food.
That's not in any way a disconnect to the past because the solutions we have from the past will be there in the future, present and future and they support these megatrends. So I hope you felt that that was a logical extension to where we want to go, but that's at least where we say this is what TOMRA looks like in 2,030. So if we look into if you don't listen to me too so much, let's look at the results. So for the year, we had a 16% growth. Of course, there were acquisition elements in that.
So adjusted for that, 11% growth in revenues for Tamara Group, 9% in collection and 14 in sorting solutions. So a quite good year in that regard. Also the earnings went up in a nice way. So we can see that we are a growing company, which have been growing now steadily year on year for quite a long time and that goes in most dimensions. I will not go further into the financials because Espen will soon take them.
Let me just then talk shortly about the Q4. Also a good ending of the year for us. We feel happy with the revenue of 21%. No particular events, except for maybe that Queensland actually went live in the quarter. But beyond that, no particular events.
We see continuous good momentum. Recycling was a little bit slower in the quarter, but there is no indication for slowdown. That was just how it distributes over the quarters, but all in all, stable and good. So we are very happy with that. Looking into the European Union Single Use Plastic Directive, this is important.
So European Union actually has the most prominent political body here in the world, I would say, is going out and saying about 2025, 25% of all PET bottles will be built on recycled content. So they will use recycled content when they make new bottles, 25% out of them. And by 2,030, 30% of all plastic bottles should contain recycled content. That's very, very important. It's not only telling that we need to collect the material, we also need to reuse it.
That will enforce the industry to really look into how they design the products and we need to build up the systems for enabling this. And for TOMRA that means good opportunities. I cannot guarantee anything, but we see good opportunities both in terms of collecting, because by collecting, number 1, you get hold of the material, which is very important in order to recycle it number 2, you get hold of the material in a good quality way And number 3, you actually have visibility onto what you get hold so that the downstream know what's coming in here. If you think of a traditional waste management, a lot of waste is coming in, but it's very unstructured. You don't know the quality, you don't know the quantity, etcetera, but such a system is very precise and we know that by experience because our machines to 65%, 70% are actually connected.
So we know exactly what's happening on the instant. So that's very important. Secondly, they're talking collection targets, 77% by 2025, that is what should be collected of all the plastic bottles and 90% by 2029. In our world, we don't think that this is possible unless you have a deposit system, but we will see what comes as proposed. But we think this is a very positive indication for the industry.
Further to that, talking about extended producer responsibility, it's a very important element. It costs money to take back waste and the extended producer responsibility should help that. And they also talk about cross collaboration, which I touched on before, which is a very important element to really make this shift from a linear to a circular economy. The whole industry must work together. What's working good today is the front end, the collection and the recycling, but also these consumer goods producing companies or bottle producing companies need to adapt their process and say until now they use virgin material predominantly.
Now they need to design their processes in a way that they can take recycled material. But then of course the industry also need to guarantee the quality and the quantity at any given time. So it's a system that needs to be put in place. We have the know how to do that. We are very eager to do that and we look forward to contribute to realizing such a system for the European Union.
And I hope that will also be some kind of a motivation for other parts of the world. So in addition to that, there will be some product bans, which is very logical. Like think of it, the plastic is a fantastic material. It's designed for several 100 years of usage. And then you have a plastic straw which you might use for 10 seconds for a drink or a minute for a drink depending on how eager you are or thirsty you are or tops, the ear tops with a plastic bar in the middle there, it's not needed.
You can actually find replacement for things like that and they are addressing that, which is totally right. That is not so relevant for our business case, but it's a good initiative in the totality. With that, I think I should hand over to Espen to give you some more fundamental into the numbers.
Thank you, Stefan. First, as always, quick look at the currencies comparing 4th quarter in 'eighteen versus 'seventeen. We see a rather flat euro, but a stronger U. S. Dollar both versus Norwegian kron versus euro, which is a positive for sorting.
On collection, we also have a lot of dollar costs, so it's more neutral on the bottom line in collection. Financial highlights, strong quarter, all time high revenue, not only on group but also for collection of sorting isolated, plus 14% and plus 17%, respectively. The margin is stable in both units, meaning the gross margin. Operating expenses is increasing because of higher activity in both business areas and also some inorganic from BBC. But bottom line, EBITDA $396,000,000 is up 32% from last year.
Looking at balance sheets and cash flows, measuring the year end currencies, we also had the same effect where the dollar has strengthened around 6% and euro more flattish, 1% up, meaning end of 2017 versus end of 2018. So the balance sheet has expanded somewhat in different currencies. Looking at the line items, in addition, you will see that starting from the top, intangible assets has increased because of the BBC acquisition. The tangible non current assets, what we previously called fixed assets, has increased because of further expansion in New South Wales, Queensland and to some extent also some redemption centers, some material recovery activity in the U. S.
Inventory and receivables has increased, so has also noninterest bearing liabilities, meaning mainly accounts payables, but the net of them has also increased being higher working capital today than we had previously, again, a consequence of higher activity. So the interest bearing liability has increased somewhat because we have almost but not entirely managed to finance both the compact sorry, the BBC acquisition, New South Wales, Queensland and the dividend through cash flow from operations. So talking about cash flows, we came in almost identical to last year and the year before. So a rather strong cash flow, even though we have expanded somewhat on our working capital, particularly throughout Q4 compared to last year. But solidity and gearing is solid and the gearing is low.
We will implement IFRS 16 starting Q1 this year. And the estimated effect, meaning the total balance sheet, is assumed to increase with a little south of SEK1.2 billion. It's mainly land or property and vehicles, which you have to put into the balance sheet. The final figure will be announced together with the Q1 report. Dividend.
Tamra had, for the last 8 years, been living under a regime where we pay out 40% to 60% of the earnings per share in dividend. Looking at the top left graph, you see that we have been within this bound. This one is expressed in absolute figures and the top right is in percentage. We also and this can be done because we have a rather low gearing. It was 5 years ago around 1.5.
Now it stayed below 1 for several years, even though we during the last 2 years has acquired Compact, acquired BBC, invested in New South Wales, invested in Queensland, we still have a low gearing. And as I said, the equity is solid, north of 50%. So TOMRA with significant recurring revenue, strong balance sheet, could take upon significantly more depth than we do today. Even now for National Strategy, we say that we should maintain investment grade, defined as at least BBB- in S and P's rating system. We are not rated.
I'm not planned to be rated, but banks tell us today that they look at POMOS as A minus. So if you accept that the lease can take 3 times interest bearing debt or EBITDA as debt and maintain investment grade, there is at today's run rate room for take up 3 $1,000,000,000 more of interest bearing debt. And I personally believe, at least in ramp up here, we can go slightly above 3 also. So at the same time, there are significant opportunities out there, as you know, and some of them needs to invest also. But the timing of this and what role TOMRA will play and what kind of systems that we will materialize is, of course, somewhat uncertain.
So what we see is that within the next 12 to 24 months, it's unlikely that we will not manage to execute upon those opportunities with the strength we have in the balance sheet and the gearing opportunities we have standalone. For that reason, we feel it's right to give out some extra dividend now. In the long term, let's see what's happening. I hope that if everything materializes in a positive way for us and we will need to invest in some of these models. We will also be allowed to go back to the shareholders because that state has proven that we continue to manage to provide a decent return on these projects.
But that's not likely within the next 12 to 24 months. That reason, they will be paid out additional NOK2 on top of the NOK2.50 as an ordinary dividend at after Annual General Meeting assuming they will approve the Board's suggestion. With that, we leave the stage for Stefan and Collection Solutions.
Thank you, Esben. So yes, we are in a situation where we are growing in both businesses. Collection Solutions traditionally have not been growing so much. We have been experiencing now more new markets coming on board. We had also in the period '15 to 'eighteen, we had a replacement in Germany.
We see that that cycle now is towards an end. Maybe even 'seventeen and 'eighteen was already kind of the new normal. We think something like that will be the new normal in Germany. So what we have seen in 2017 2018 in Germany, we had a very high spike, if I say so, in 'fifteen and 'sixteen, actually grow 35%, 'fourteen percent to 'fifteen percent. So that was a strong growth for the whole business and Germany more on top of that.
And of course, we are very pleased because that was a big project for us. We launched a new technology that could have failed. We got a lot of replacement opportunities in the market and it seems we were timed very well to capitalize on that. So we were a bit overwhelmed when that started. It came more in the beginning than we had expected.
But if I look in the mirror from now looking back, I'm very pleased. We got we could expand our market share. We got our new technology both working and embraced by the market. So great period. But there is no further drive for growth from Germany.
As such, we think it's still a stable market, but rather now on a new normal. So that's what I wanted to have said here. If I look into the last quarter, we had modest growth in all traditional markets, so modest growth in local currencies in Northern or in Europe and modest growth in North America. So that's good. And the drive of growth is coming predominantly then from new markets.
In this case, New South Wales contributed to growth because it was the 1st full year and then towards the end of the year, we got a little bit support also from Queensland. So such a market like Queensland used to us with, it takes some time until they are fully the full utilization of the system. Even we might have all the machines out there, but there will be a steady growth as the more and more consumer embrace the new system. That's our experience. So that will be positive for us going forward as well.
But also remember, we are investing quite a lot in our businesses, both in sorting and in collection. It doesn't come for free to go into these new markets. We have to prepare quite a long time. We might need to do some adaptations of product design, which we have done in both New South Wales and Queensland And we might also need to reengineer our production systems at certain times. So it doesn't come for free.
This growth also drives some operating expenses, but I think everyone who has experience in the business understand that's natural. But looking at it, we had a 14% growth in the quarter in collection, which is nice. And I think all corresponding numbers are following through in a good way and I'll let Espen take the numbers later on. Rather, I focus a little bit more on some of the markets we are zooming in on. As I said before, in wake of the European Union, in wake of plastic ocean, there is more momentum into deposit markets.
Western Australia is maybe the most advanced one here. They are in a process where they are evaluating the new system here and we expect to get some feedback on where they are heading fairly soon here, but they are in a very final stage. Will be exciting to see whether they will lean to the what's the Queensland system more or towards the New South Wales system more. We are of course experiencing both of them and I don't want to give an opinion of which one is the better one. Queensland is fairly new, so we don't have so much experience, but we are ready to serve if it would go in any of these directions.
Scotland has been clear that they want to introduce a deposit system since sometime and they have had a consultation period that has ended. What is next to be looking at there, it was will be the recommendation of the consultation period. And that is something we are actually expecting any time now. So that should come here fairly soon to see what do they decide after that consultation period. But they are clear, they want to go ahead, they are not waiting for England.
So it's a positive and we're expecting there somewhere around 2020, 2021 that, that system will go live. Portugal has come a little bit like a rising star from a blue sky like they do in soccer. They're good there too. And they have given us some kind of indication that there is a law in place and they want to do something. They have instructed retail to prepare for making pilots and they want to proceed with that.
So that's really a positive development for us. And of course, we are supporting and geared up to support that too. Potentially 2022, we think, could be a system there. And then we have England, which has been on the agenda for quite some time now. They have delayed the system.
Originally, it was said 2021. Now it's said 2023. But then they have also affirmed the system. So we are pretty sure will come. And they now has launched their consultation process, which is a logical step in such a evolution.
And that should take 12 weeks, if I'm right informed. So after the 12 weeks, they will close the consultation, they will go in and do their evaluation and then hopefully we will see some outcome of that. And when we say England here, that includes also Wales and Northern Ireland. So that is the definition in this case. So we think that's exciting more than we have had in the past and these are the more concrete ones.
Of course, the other countries in European Union and abroad that are looking into this, but these are the ones we think is worth talking about at this stage. With that, let's look into how that business has performed financially, Jesper.
Thank you. Yes. Quick look at the figures. As I said, all time high revenues is actually stronger than we had back in the best quarters when we have the German replacement race in 'fifteen and 'sixteen. The contribution for growth is, of course, Australia, which is reported on rest of the world.
And also to some extent, U. S. Has performed good the last quarter. The margins are maintained stable and OpEx is slightly increasing last year, meaning Q4 'seventeen, we had extraordinary costs related to New South Wales ramp up. This year, we have the ordinary running expenses from New South Wales, Queensland ramp up and also general ramp up on top of this that these elements equals out more or less.
That was the collection figure. And then we are going over to sorting.
So since we know that collection is business that is more tied to deposit markets, there's no such limitation on sorting. So we have installations in about 80 countries. We have more than 10,000 sorters. We are active in recycling, in mining and in food. We have experienced very strong momentum in recycling.
We have experienced very strong momentum in mining. We have experienced good momentum in food. As I said before, food is less event driven. Mining is more cyclical and recycling is really capitalizing on this plastic ocean, national sword events, which I mentioned about it before. In the extension, that will also transform into a new set of demand for recycling because when the consumer goods companies say we will use recycled material like we saw in the European Union directive, well then we will have more need for sorters again because then it's really about making a very fine product.
It's a plastic being a commodity or a resource that is in an unstructured form not really usable, but to be able to deliver a very defined specification over time, that is the job and there that you cannot do without the sorters because you cannot even see with a human eye the difference between certain different plastics, they might look the same to you, but our sorters will see the chemical differences between them. And in order to build that circular economy, that is a needed absolute needed function. So there will be an extension, a replacement from this national sword driven market, which we experience right now, there will be a new market demand growing up here progressively over time. So we are very positive over the long term outlook here. We also have a enjoy a very strong market position, north of 50%, well north of 50% globally.
We are well placed, I would say, also when it comes to recycling in emerging markets, really well placed. I'm happy with that. Food has a longer journey when it comes to emerging markets because our technologies are really developed and geared up towards the high really it's sophisticated processes you find in North America and in Europe when it comes to food processing. When you go to emerging markets, say China, India, you come from a completely different level. You come from very basic, very manual.
So there would be a more gradual solution. So for us, it would be the challenge, can we find the right solutions to support that evolution. But these are markets we're looking for. So there is no immediate end to the demand here. I don't see short term, long term or medium or long term, there will be no end in demand.
The demand is there and it's a very important sector. So we are pleased. I think we are well placed in all these three. And the business is really has progressing very well. When Espen show you the financials later on, have a look at the long term development here, how that has been growing.
I think most of what you will see from Tamara going forward will be organic. I do not exclude some acquisitions, but predominantly organic. I feel we have a portfolio that is fit for what we want to do and that's good. There's nothing really we need to divest and there is no big investments needed in that regard either. So we are fit.
We can do a lot organically by our own developments of products, of solutions and by geographical expansion. It will drive some cost increases, but we also see that we are growing so and profitability wise so too. So with that, I think I could I have already talked about the different sectors. So I pass over to you, Espen, to sum up the finances around that.
Yes. Strong revenue growth, by far the best quarter we have had in sorting. All major geographies are contributing. And on business stream level, it's food and mining, which actually is the ones that contribute most to the growth this quarter. Gross margin is stable despite a somewhat negative product mix.
The additional revenues helps on the margin side, even though most of the cost of goods sold in sorting is variable. There are some fixed element also, so additional volume helps on the margin side. Operating expenses is increasing as a consequence of higher activity and preparations for the future. Looking at the order situation. We have, as I said, strong revenue in 4th quarter.
But since also the order intake was strong, up 19% in the quarter, we also end the year with a healthy order backlog. I sometimes being asked about seasonality and then looking at it, you see here that it's very typical Q4 with strong revenue. Many customers want to complete their orders before year end. At the same time, you also so consequently, you see a lower order backlog at the end of the year than the usual that the 3 quarters before. But looking at the order backlog, one should look 1 year back.
That's the most relevant reference point in that respect. Q1 is usually somewhat slower and that's related to the food seasonality where most of our activities in the Northern Hemisphere and it's winter and customers do not much want installations that much in that period. So the ore conversion ratio is assumed to be around 75%, meaning we believe today that the order the revenues for Q1 'nineteen will be 75% order order backlog at the end of Q4. This is not guiding. It's just an indication for those that want to model us.
This was the past and then a quick look at the future, starting with collection. Overall, we expect base business to be stable. Germany, significant market for us, was stable 'eighteen versus 'seventeen after the replacement race in 'sixteen and 'fifteen. And we assume also going forward, no significant changes in the activity in that region. So it goes also for most other units.
On top, you will see we get a full year New South Wales effect with the full installation and also Queensland, which is not in there for the 1st 3 quarters of 2018. So consequently, comparable figures will improve for that reason. So the rest of business will be stable or slightly increasing. That's the top line. When it comes to gross margin, we don't expect any significant changes.
OpEx is very dependent upon what opportunities we see in the market. As you know, we are ramping up the organization, preparing for what is about to come. And some of this OpEx is related to concrete project and the timing of those, as you know, is somewhat uncertain. But all in, ask I mean, sometimes ask about a figure. Let's assume that the OpEx next year, very round figures, will be €100,000,000 above 'eighteen, meaning 'nineteen above 'eighteen for the entire year as just an indication, and let's see where we end up.
On sorting side, I said 75% conversion ratio and the momentum in general is good in that business area. And OpEx is probably to be more in line with what we saw in 4th quarter. Since we have had the ramp up in 4th quarter, it's maybe not that much increase in the next quarter. Also remember currencies. So far in Q1, we have experienced strong dollar.
And compared to Q1 last year, we consequently could assume some tailwind on the currency if that stays out the rest of February and through the March. That concludes the presentation, and we open up for questions from the audience and from the web.
Okay. I think we can start with a couple of questions from the web, and then we can take the questions from the audience afterwards. So there's one question from Thomas Frafjord. Can you quantify the numbers of countries that have been in contact with TOMRA regarding information for introducing a deposit scheme?
Esben, you are better at counting than I
am.
Of course, TOMRA is to some extent a company that is viewed upon the competence, not only within deposit systems, but more and more as kind of understanding the entire value chain and the circular economy element into this. So I think it's fair to say that we have delegations in Oskar at our headquarters every week from someone visiting us that want to understand better from all over the world. Where they come from, who they are and so on, I don't think it's right to announce here. And having a delegation talking to us is not necessarily the same, but they're going to implement something that could be of value to us. But it's definitely much more interest from all around from governments, from stakeholders, from out there that want to understand and discuss with us.
And this creates opportunities for Tamra. And it illustrates that there are things happening out there that is hopefully things we could monetize upon because the focus is completely different from what it was 3, 4 years ago. I don't think I can be more precise than that, but things are happening, yes.
Thank you, Espen. That's really precise
Okay. Then we take the next question, which is from Marcella Klang in Handelsbanken. Can you specify how big was the impact of the BVC acquisition on operating expenses this quarter? I guess, again, numbers.
I think I just referred to disclosure note 6 in the quarterly report. You'll find all the figures there. So just use that one.
Next question from Pete Moun. All mentioned in press recently?
Yes. I think we have to see the following way. There is both the situation of markets which we have to evaluate because of the complexity simply. Take Turkey, it's a very vast economy, a very vast geography. And if we were to enter into that market, we have to think very carefully, can we do that?
Do we have the capability? Because one thing we have to say, if we go in, we have to do it good. And that's our, so to say, quality stamp, which we live up to. We should not go in if we don't think we can do a good job. Then of course it becomes what kind of model is it?
Is it a sales model? So how do we then serve it? Is it an investment model? Do we feel that it's the right investment for us? So it's a long way to decide upon things like that.
So I don't think it's one easy answer. And in fact, that maybe illustrates that we would have more of this kind of questions going forward. In the past, it was pretty easy. It comes to new deposit market. For sure, we jump onto that.
In the future, there will be economies, which are simply we have to evaluate, prioritize also, can we do the right can we do it in a good way? Can we not do it in a good way? What is the requirement of the system? Does it require big developments of technology? Or do we have a plug and play solution for that?
Is it capital required for where we should own the installed base? Do we feel that is right or not? And can we have people working there? And do we have the competence to serve the market? So this is a very fluffy answer, but I cannot give it more precise.
Thank you, Stefan. I think then we open up for questions from the audience.
Thank you. Good morning. Edvarding from DNB Markets. I have two questions, one fairly easy and one more difficult. Start with a difficult one in the consultation periods that is currently ongoing in the different markets.
Do you have any feedback or thoughts you want to share on what the discussions are going through in types of in terms of bottle size, what would be included, if it will be returned to retail, will it be lease markets and also what is competition doing? Secondly, the easier question is IFRS 16, is it possible to identify or give some indication on the P and L impact on lower sorry, higher EBITDA, higher depreciation and higher interest costs?
Let me start with the easy one. As I said, we are somewhat south of SEK1.2 billion in asset and liability, when the EPS effect will be 0 or no material effect on the EPS, but it will be some effect between the line items. And I would assume that the monthly effect will be close to €3,000,000 between EBITA sorry, between operating expenses and finance items, meaning the EBITA will increase, improve and the finance will decrease for that effect. There will also be a significant effect on the cash flow because now the lease payments is taken out and being replaced mainly with down payments on loans. That figures I don't have exact figures for it yet, but it's it will be the same for all companies implementing this.
It is more kind of a reclassification. Give you some indications on the IFRS 16 part. The other one was a very broad question. What the feedback and I don't know if you want to
say I can say a few words. I mean, there is always some risks if we can speculate and we prefer not to speculate to be honest with you. There will be facts on the table when the consultation is over. We can get some indications, but they're also not proof. Like in England, there might be that they will include more kind of a holistic system with many docs and both for in at home consumption for on the go consumption.
But again, exactly how that spells out and what that means in business, I rather prefer that we wait until we have the facts, to be honest with you, because we have also experienced in the past that the systems do not always come as we have thought. And when we have the proof of the pudding, then we can decide what it means for us. So that is a very vague answer. But Espen, you're better at handling these questions than I am.
No, no, I bet it's a relevant question. And it's you're pointing out those discussions that goes on in almost all markets. Where will the return be? Will it be inside the store with very close proximity to the stores or will it be someone else? Who will own the machines?
And how advanced will the system be? Will there be use of machines? How much use of machines will there be? How high will the deposit rate be? High deposit, meaning higher return rate.
The convenience for the consumers, opening hours and also how broad will the system be when it comes to size of objects, type of objects, plastic, aluminum, glass and also the contents, beer, sodas and so on and so forth. All these things are up for discussion. England is the biggest one now, which is kind of rather concrete because they have started consultation period and they describe 2 different versions here. But it seems like they have decided upon going broad, meaning all material types. It's been mentioned that this privilege is £0.10 which is a meaningful amount on the deposit.
It seems like they want to have a convenient system with significant infrastructure in place where so people can easily return their entities. It's a discussion about size of objects, should have more on the go or should it be a full system? And that's open for discussion. And then let's see what comes out of that since it's so early in the process. But as Stefan said, it's a 90 days consultation period.
So a lot of stakeholders will probably announce their view upon this. But in general, it seems like they have an approach to this, which will end up with something that looks like a deposit system that we have seen in other places. And since they have a clear ambition from the government side, and that's a good start.
When it comes to competition, I think we will see all players being very interested in a market like that.
Absolutely.
In terms of the OpEx, last year, you had the €57,000,000 ramp up cost specifically related to Australia. You're indicating this year that the ramp up costs or the additional costs, if we can call it out, is roughly of the same magnitude. Last year, we saw that it was sort of more of a onetime event in 1 quarter. You seem to indicate now that we should expect the costs to be roughly SEK100 1,000,000 higher in 'nineteen compared to 'eighteen. So I guess it's not sort of a onetime event anymore in this quarter.
So should we expect now what is that higher costs? I mean, what actually are you doing in terms of sort of a continuous ramp up at this stage? What are those costs element?
Yes. I mean, it's just not one element. It's several things. Some are market specific, but most of this currently is more general than you're on the production side, on the logistics side or sourcing in general, it's on R and D. And it's market intelligence, governmental affairs and the business development resources.
I think personally, as we've been challenged, is it possible to ramp up quickly on the production logistics? And of course, I see the challenges. But that's maybe not my biggest concern because I think that's something we can deal with if if we just plan properly. But this is having all the resources, the competence, having the dialogues with the markets, establish ourselves in new markets, having the people on the ground that has done this before, that have the competence on to build deposit systems. So it's about skilled people to being out in the markets.
That's maybe the biggest challenge in this. And this is something we have to invest on upfront also. So it's a total of several things. So far, it's not that much market specific, but that will come as we go going forward here. So maybe not a very precise answer, but it hopefully gives you a fletch upon what we're doing.
Let me I think the answer is yes, I just want to make a little bit more clear. So let's say there are 5 markets now in within the European Union that are looking to potentially introduce a deposit as a result of the European Union Single Use Plastic Directive. Now what does it mean for us? Well, we need to be there. We need to be there to consult with the government.
We need to be there to talk to the relevant stakeholders like retail and so on. So we need to actually establish a team of a number of people, not huge, but a team. There might also be new requirements after that market saying that well, if we want to serve that market, we have to have these and these specific features in our products. It might not be a completely new product, but take in New South Wales, we are using PayPal. That was a new feature, which we haven't used in the past.
But I just give it as an example. So there will be product adaptations or product developments. There will be this consultation. And then, of course, if we then think that we will have to produce more in the future, we also need to ramp up the supply chain from suppliers, making sure that we have sufficient capacity, maybe a backup source, our own production capacity, are we fit for that? And we need to employ people as we go.
Look, New South Wales, actually we have, I think, I hope I'm not revealing something I'm not allowed to, but he will tell me afterwards now. We have about 100 people in New South Wales operating. And to get such a market up and running in a short time, that is an investment. Now that was an extreme case because that went very quickly, but I hope it illustrates to you that growth doesn't come for free. We need to invest in that.
And since we are seeing so much now here in the horizon, we actually need to have a number of parallel processes and we are investing. We are ready to invest in that growth. And we think that if we don't do it this way, we will we might get a good result, but we might not get the same quality and we want to make a good quality system. We want to contribute to a good society like we have seen in Lithuania, New South Wales and I think also in Queensland, where we say when we go in, it's a good system. It's a TOMRA system.
If I can follow-up on the growth. We're seeing the consultation period being started already in the U. K. Or in England for a possible introduction of deposit system in 2023. The EU target is 77% by 2025.
You would expect then that perhaps some of these other markets will have to sort of look at this now very, very concrete, if you will. What are the initiatives that have been taken in France, Italy, Spain, some of those larger populated countries in Europe?
I think we just mentioned it. On our side, initiatives is that we are building up an organization to support the processes locally and visiting that they will come. So that is and then the level of consultation on different markets, I think Espen was into that before. It's a broad range, but for sure there are more activities. So please accept that, that is nature.
It doesn't come for free.
I think all markets are, to some way, looking into this because everyone knows it's coming, and they have to fulfill these new obligations. And no one is compliant with this now. And in our opinion, only way to get to 75% and then to 90% is through deposit. So all markets, but yes, they are not kind of some are confederate another. But everyone is are someone looking into this.
And that's what is making it exciting, but also challenging because each country will have their own process and the solutions will not be the same all over. They will choose their own way to meet these targets and how to collect the material. So but we will at least try to be present where there is activity.
And of course, it turns out for us as operating expenses is not an investment. But in a way, you could view it as an investment. We have to invest in operating expenses to be ready to solve these markets. I hope that is given somewhat an understanding, but we see this as fairly safe investments. I mean, it's not that maybe something is coming.
We think this is really going to happen at one stage or another in the market. So we see it would be a mistake from our side if we were not investing in the opportunities.
I think we understand that. It was more sort of what is actually happening in some of those larger countries. At what stage are they discussing, given that England is already in the consultation phase in a way, and it's going to start in 2023. For most of the other countries to be up and ready and to achieve 77% by 2025, They probably will have to have a system in place, 'twenty four maybe. And then you would think that they would have to start a consultation period fairly soon as well.
Is that sort of happening? Do you see that those types of discussions in these markets? We
see the discussions happening. They might not have consultation. You know the European single use plastic directly is fairly new. It's not even hammered fully, right? It's not by law yet.
Yes.
It's a ratification that remains, which is a formality. Exactly.
But so it's very new.
Mickey, Nielt, Carnegie. First, a question on Queensland. Given that you had 2 months of operation now, are you able to say anything about the revenue and hopefully, the EBITA from that region and eventually what you are expecting for the coming months. I assume that you're also there as in New South Wales, are in a ramp up period where you're not in you don't see full volumes already.
Yes. We said initially very, very, very broad figures that we will invest NOK50 1,000,000 and get NOK50 1,000,000 revenue on out of Queensland. And we are on track on that. And I think I'm not prepared to be more precise than that.
All right.
Second question then on the margin in Sorting Solution. For myself, I had expected a slightly higher margin this quarter. Are you but are you able to say anything about the increase in the operating costs? Is it all related to ramp up and positioning? Or has there been any, call it, underlying increases from other cost factors?
No. I think there's a sum of several things, but it's partly about delivering the all time high revenue we have in this quarter. But it's mainly about preparing for the future. So also for that reason, I said that going into Q1, I think the level we are at now will not increase significantly from that. But that's, to some extent, a level you can expect going forward.
All right. I follow your comment on OpEx is or revenues also drives OpEx. But coming from a situation where you've said that typically, the OpEx is flat and that you'll have a higher degree of operational leverage, therefore, my question.
Could you just elaborate on it? I think if you go to when you see the disclosure note on I think it's number 10. In the end, the report was unreleased. You can see how much we use in R and D. And you will see at least it's always accounted for there.
It's a €100,000,000 increase in R and D in the group in 'nineteen versus 'eighteen. And that explains also partly OpEx increases. So it's also investments for the future.
Last one. I was slightly puzzled by the geographical split in the revenue stream collection solution. I was surprised by the level in Europe. Is all that related to Germany? Or so there are other countries there with growth than this quarter?
Yes. No, go ahead.
That region comprise Austria, Netherlands, Belgium, which is the most important market after Germany.
All right. So quickly following up on that then, are you able to say anything about how Germany developed year over year Q4?
I have to look into it, Germany alone in 4th quarter. But the number installation for the total of the year has been stable. And I think Europe year over year is also performing stable. So it's always could be single orders and so on in markets where quarters could fluctuate a little bit. But the European market, including Germany but also the other countries in that region, are performing rather stable overall.
And that also shows the figures if you look at the full year figures.
All right. Thanks.
Christian Spottal from Spadovakia Markets. So regarding your 18% EBITDA margin target by 2023, could you give us a feel on in what business streams do you expect margins to improve and maybe when?
I think starting with sorting, we have opportunities to do better. And it's both on the cost side, but also it's about revenue growing where you get the leverage effect upon that. So we are in total not satisfied with the margins in some of the areas within sorting. When it comes to collection, it's overall rather good margins. And I think it's realistically hard to expect significant more.
Of course, now we will, for long periods, get a negative effect from ramp up costs. But over time, this, of course, is assumed to generate revenue and profit also. So but historically, we have had good margins in connection and a further improvement of that is probably not very realistic.
If I can ask one more question. So according to my understanding, it's the mid market that's driving growth in food storing market. And thus, you also outlined on the CMD in October that you would enter this market. So do you think it would be harder to increase your margins in food when you enter this market? See like you meet smaller enterprises that are more cost sensitive than the big conglomerates like Nestle and PepsiCo?
I do have to correct you. I don't think it's a mid market loan. I think we see growth in most sectors. So but in food, we have a journey to improve. We are quite broad based.
We are serving a lot of markets, and we have been open about that, that we are working towards improving that. But I think it's actually about many levers. It's not one significant. It's quite a number of areas we have we are addressing there. But product margin, for sure, cost management, for sure is another one, but also pricing and being focusing on where you sell, making sure that you generate more values.
That's more strategically relevant actually than hunting for costs. If you can make your customers more successful, if you can drive growth and profitability by improved pricing, That's more where you really want to play than by just running off the costs.
I'm sorry if you thought that I said that you said that the mid market was going to drive growth, just to report around the world.
No, but the emerging markets will be very critical for the future, and there will be a long journey there. And that is probably going to be a challenge also, but we have to take step by step and find our ways to make that right.
Tore Yeppemoun, Private Investor. You were very modest in your outlook, I think, and doesn't say much about the growth that is coming. And you at the Capital Markets Day, you gave a lot of metrics. I don't remember all of them. But could you say something about the progress according to those metrics that you gave us on the Capital Markets Day?
What we said on the Capital Markets Day was that we, within the next 5 years, assume on average to grow top line with 10% organically. And EBITA margin should, by the end, at least be 18%. That's the target you are referring to. We also said that this is the average over 5 year period and each year will probably be different. And particularly looking at collection, growing the business in existing business is hard.
If you go to a market like Norway, you find a machine in old store. So it's hard to grow with a high mark when you have a high market share in a very mature market. So growth in collection is very much linked to new initiatives. And as you know, there are several initiatives out there. So we have a good faith that there will materialize opportunities in here.
Timing is somewhat uncertain. But you also said that growing 10% in 'nineteen will be very difficult because there are really no new markets opening up in 'nineteen that will generate revenue in a meaningful way. But going into 'twenty and particularly 'twenty one and so forth, this will be upside down. So we have to look at these targets over the 5 year period. And in collection, the growth will likely be much higher in the end of the period than the beginning of the period.
In sorting, it's we don't guide on other than give you an indication of the next quarter, which implicit gives a good growth in that quarter. And adding up the opportunities, we feel a commitment to believe after that segment, even though it's not a 10%, it's not broken down, it should be possible to grow sorting 10% also. But since the less recurring revenue in sorting, now around 20%, 20 plus percent of the revenue is service related. It's more about getting out there, selling more boxes and so on. And it makes it somewhat more lumpy by nature.
So it's that reason also harder to be precise on vendor growth coming year by year. But adding up the opportunities in total, we feel committed to deliver 10% growth on group level, and I think this makes sense adding up from the units level also.
And I don't think we should see that there's any disconnecting what we are saying here short term, what we're saying long term. We just also traditionally are not giving you very precise guidance. That is our way of doing it. Of course, it's not appreciated by everybody, but that has been our way of communicating. It's financial targets.
I like to over perform in part of that.
Yes. We
will try to do that.
Okay. I think we can follow-up with a question from the web. You have probably answered it, and then you can just say that you answered it. And it's a question from Pete Moon. How do you feel about the long term goals sketched out for the CMD today versus when back in September?
I think nothing has changed on the negative side. On the 5 year period, we think it's achievable to deliver on those targets, and we plan for delivering upon them. And yes, Donker, if you have anything more to add?
No. And I feel, as I said before, we have the relevant portfolio, what we need. So we know what we're going into. We see the market evolving. It's just do it.
And of course, not everything is in our control. Does the deposit market come? Yes or no. That's more likely than less likely now than it was in the past years. But we know what we're doing.
We have the right portfolio to address it and the markets are getting even more positive for us. So I think there's no disconnect. We feel that we are working on the same track as we committed to in the Capital Markets Day. And I think also look back, we have been growing now with some 15% per year over the last 5 years. So we have also lived up to that in the history.
So it's not dream numbers here. Definitely, we have been open about that. There is room to improve on the profitability, and we are working towards that. But we also need to accept that we better invest in new opportunities than focus on the single year profitability. So we discussed that before here.
Okay. Follow-up.
So following up on that. So the recycling market looks like the global market looks like it can be growing for many, many years. Have you thought about expanding business more into this recycling market? And do you see any new opportunities today?
So the question is expand the scope. So for us, it's very important. TOMRA has a tradition and a philosophy, if I may say. So we focus on what we do. So we don't want to step around every week.
But already by going to circular economy, which we have committed to, that's where you actually start connecting the dots, the collection solutions and the sorting solutions. And with that, you open up new opportunities. For instance, the digital services, what kind of value added services do I offer? Do I need to develop new type of collection solutions for maybe taking other objects than I did in the past? So there would definitely be a lot of questions, but we want to stay focused on our core.
I think that's what we have time for today. Thank you for listening in, and thank you for attending.
Thank you.